Today we are going to finish our discussion of William Thompson’s criticism of the capitalist economic system and his criticism of the discussion of capitalism in the economists of the period. I am starting this diary with a general discussion on the theory of distribution in classical economics, so that this diary can stand alone, which I think that Thompson’s argument deserves.
A general discussion of distribution in Classical Theory:
Thompson’s argument on distribution actually serves as an excellent way to clarify the classical discussions on the division of the product between wages and profits or between labour and capitalists. Distinct from modern arguments, where the minimum and maximum of wages is either seen as the total product going to capitalists or to workers, the endpoints of classical distribution differed. Thompson places clear limits to minimum wages and maximum wages. In actuality, given the structure of the theory, the capitalists can never claim the whole of the product. The workers are entitled at a minimum to the subsistence level of wages (the subsistence level is that ensuring the subsistence and reproduction of the working class) which is seen to be historically and socially determined. This is never under debate in wage bargaining, as it is the floor to which workers wages can fall. If you do not ensure the subsistence and reproduction of workers, you cannot continue production in the system, it is as easy as that and economists which were in favour of laissez faire (e.g., Smith and Ricardo) recognised this as a fact. What is under discussion is the distribution of the product over and above the reproduction of the system at its same level, i.e., the surplus product.
Now, what else must be replaced to ensure that the system is at the same level? There is a difference between wages and profits. Obtaining profits depends on a successful realisation of the surplus product, that means essentially, that what you produced was capable of being sold at a price that not only covered what you laid out for wages and capital and the use of land (this assumes that all of these are paid prior to production commencing), but an additional amount. If your agents of production (labour, capital and land) are paid after production, then wages must be covered, and your debts must be paid first, those being rent and the payment for capital used as raw material. Money needs to be put aside to cover the capital used up in the production process (constant circulating capital) and the depreciation of machinery used in the production process and which will need replacement ultimately when it wears out either by the same or different machinery.
Given the assumption of Say’s/Mill’s Law from 1808 onwards (irrespective of small outcries from Lauderdale, Malthus and until its overthrow at least in the short-period by Keynes), this is not a problem, as it is assumed that production creates it own demand and there is no problem with realisation, what you produce will be consumed.
This leads us to the minimum level of profits. If production is successful and you realise the surplus product, then the base level of profits is literally the rate of interest; instead of keeping your money in the bank and earning interest, you entered production. Given guaranteed realisation, we have to add these other components which will give us the minimum rate of profits that is the replacement of capital used up in the production process and covering the depreciation of fixed capital.
Our minimum wage (maximum profit) is the subsistence level of wages (this means that the workers do not obtain a part of the increased growth of society as compared to the last production period. Our maximum wage (minimum profit) is the whole product minus that part that covers the base rate of interest and the replacement of capital used up in production and which covers depreciation; this allows for no new growth in investment by the current capitalists (but this does not prevent workers from using it for the purposes of production and that is an important point for a socialist and believer in the co-operative movement. Let’s look at Thompson on distribution.
Thompson:
Wages:
According to Thompson, in a competitive society, where competitive equalled the capitalist economic system, and the worker did not receive the social product, wages were seen to be the remuneration which enabled the subsistence and reproduction of the working class.
[...] while the great mass of the industrious remain at that competitive point of remuneration which enables the laborers to live out their average round of years, and to leave behind them a new race to continue the routine of unattractive, unrequited, toil (Thompson, 1827, p. 32).
Thompson then proceeded to articulate the first conception and criticism of a "labour aristocracy."
Those classes of trades or subdivisions of classes which are best remunerated, (for the same class is not always even in the same country in all places equally remunerated) are the mere aristocracy of trades, possessing no superior utility, skill, or good disposition, with no more pretensions to serious merit than any other aristocracies, but frequently partaking of the vices of all aristocracies, full of unsocial antipathies to those less remunerated than themselves, and spending in short-lived gratifications productive of preponderant evil, that superior, but still pitiful, remuneration out of the products of their labor [...] (Thompson, 1827, p. 32).
Thompson, following Ricardo, believed that the market wage (that is the wage paid in the market, the actual wage, not the theoretical variable) is determined by the size of the labouring population in relation to the demand for its services.
Neither by utility nor by skill, nor good disposition to industrious exertion, but by the plenty or scarcity of hand proportioned to the demand, are the shares of the national produce, which are now given to different classes of labor, regulated (Thompson, 1827, p. 22).
A digression on Cheapening of the cost of the workers consumption bundles (aka lowering the value of labour power by Marx:
Thompson's knowledge of Ricardo can also be seen in Thompson's discussion detailing the fact that an abundance of fertile land which would cheapen the cost of the worker's consumption bundle may not be in the best interests of the working classes.
That cheapness of food, - whether the result of improvements facilitating production, or of the command of unoccupied fertile land, or of the abolition of restraints on free exchanges of food domestic or foreign, - is not always a benefit to the whole body of producers, demonstrates a radical defect in social arrangements, which the Competitive System, even in its imaginary state of perfect freedom, can never remove (Thompson, 1827, p. 59).
Thompson additionally examined the impact of machinery in terms of cheapening the products of labour, in that less direct labour was employed in their production. However, he argued that the workers were not receiving the benefits of the increased productivity.
Improvements in machinery have wonderfully facilitated the production and, consequently, cheapened them to the consumers, to the capitalists and idle who are the real consumers of the products of labor, not increased the consumption of the industrious producers, as compared with the quantity of labor now exacted from them, who consume so little of what they produce. Though machinery has cheapened the products of labor, has it raised the real remuneration to the laborer? Certainly not. ... Production might be increased, or might be prevented from retrograding: but as to the distribution of those productions, the principles of distribution remaining the same, the difference would be only in the great buzz of activity, in the greater quantity of articles being carried to and fro by greater numbers of the industrious, and consumed by proportionally greater numbers of the unenjoying idle (Thompson, 1827, pp. 57-58).
Profits:
Thompson believed that the capitalists had the right to obtain a recompense for allowing their capital to be used in production by the workers.
In attempting to determine the profits of the capitalists, Thompson argued that there were actually two different measures: that of the labourer and that of the capitalist, which could be utilised in order to ascertain to what the capitalist was actually entitled. According to Thompson, the measure of the labourer would be that which would replace the capital used up in production and to account for depreciation of the capital stock, in addition to an amount which would be sufficient to maintain and reproduce the capitalist. The measure of the capitalist would be for him to receive the whole additional surplus product derived from the use of capital in production. Thus, according to Thompson, what is appropriated by the capitalists was that additional surplus product produced by the workers used in conjunction with capital in production, over and above what would have been produced by the same number of workers without the aid of capital.
The measure of the laborer consists in the contribution of such sums as would replace the waste and value of the capital by the time it would be consumed, with such added compensation to the owner and superintendent of it as would support him in equal comfort with the more actively employed laborers. The measure of the capitalist, on the contrary, would be the additional value produced by the same quantity of labor in consequence of the use of the machinery or other capital; the whole of the surplus value to be enjoyed by the capitalist for his superior intelligence and skill in accumulating and advancing to the laborers his capital or the use of it (Thompson, 1824, p. 167).
However, the actual amount of profits that the capitalists received, according to Thompson, was determined by the level of class struggle.
In point of fact, neither the measure of the producer nor of the capitalist prevails; but a measure between the two, formed out of the conflict of their opposing interests, and varied by a thousand casual circumstances in every society (Thompson, 1824, p. 171).
The two opposing measures of the labourer and capitalist could not actually be pushed to their limit. If the measure of the capitalist was successfully obtained, it would be detrimental to increasing the quantity of commodities in the country, as the productivity of the workers would, of necessity, fall due to lack of sufficient motivation. The measure of the worker could not be successfully implemented in a capitalist economic system, as those in political and economic power would not allow it. Additionally, he argued that the workers, at that time, did not have the sufficient information to either determine the level of output, how to produce it, nor to realise their own interests in this regard as they did not understand their exploitation. This argument is what underlay his opinion that the workers needed self-education to understand their exploitation so as to be able to fight for their interests. This argument could also be seen in the writings of his followers and in the then contemporary worker's movement (e.g., National Union of the Working Classes).
The measure of the capitalist of the value of the use of his capital, pushed to its extreme, would annihilate production from its zeal to accumulate or to appropriate to itself the products of labor. The measure of the laborer, without the universal diffusion of knowledge and justice could not prevail. In proportion as force and fraud have been removed in the progress of the development of wealth, the tendency has been towards the measure of the laborer (Thompson, 1824, p. 171).
The rate of profits:
Thompson asserted that the remuneration to the owners of capital, or the rate of profit, was unrelated to the absolute amount of capital accumulation, but instead depended on the manner on which capital was distributed.
The amount demanded for the use of capital depends more on the mode of its distribution than on the absolute quantity of capital accumulated (Thompson, 1824, p. 171).
What Thompson meant by the price of the use of capital being determined by distribution was basically, that the rate of profits depended on who owned and controlled the use of capital. He maintained that the larger the monopoly of capital in the hands of the capitalists, the greater the profits that could be obtained from the workers. For example, if each worker had ownership of some of the capital in the economy, Thompson argued that the rate of profit on the use of capital would be very low, as the low level of competition amongst the producers for its usage would be insufficient to raise its price.
Whatever may be the amount of capital accumulated, whether large or small, if it all remain in the hands of the producers, the price demanded for the occasional use of any portion of it would necessarily be at its lowest, from the persons unprovided with capital, and from the feeble competition for the use of it (Thompson, 1824, p. 172).
Irreconcilability of Interests of Capitalists and Workers (the inverse relation between wages and profits and the rate of profits):
Thompson argued that in a system run by competition, the interests of labour and capital were irreconcilable. This irreconcilability manifested itself in the inverse relationship between wages and profits.
According to Thompson, the fact that the capitalists possessed the commodities which would compose the workers' necessary consumption bundle in the next production period, fixed capital, and the ownership of the worker's dwellings enabled them to obtain the workers' labour at a low price which ensured a high level of profit. Given their monopoly possession of these commodities, the capitalists will offer the lowest wage that they could. This would ensure that the workers received, as wages, much less than the full value of his labour time as compensation, thereby securing greater profits for the capitalists.
The capitalist getting into his hands, [...], the consumption of many laborers for the coming year, the tools or machinery necessary to make their labor productive, and the dwellings in which they must live, turned them to the best account, and brought labor and its future products with them as cheaply as possible (Thompson, 1824, p. 241).
Thompson attempted to show the relationship between wages and profits, given the value of the workers's yearly product. The higher the profits demanded by the capitalists, the less the value of worker's produce which remained for his own consumption.
For the use of one hundred pounds capital, the employer will require a profit of ten to twenty, say on average fifteen, per cent. The yearly value of his labor remains as before thirty pounds. Thus, one third, a half, or two-thirds, of the value of his labour, according to the quantity of capital accumulated and other circumstances influencing the rate of profits, are abstracted from him and handed over to the possessor of capital (Thompson, 1824, p. 591).
Thompson additionally seems to be arguing that when a high profit was obtained, this increased the price of capital goods to the workers. As Thompson conceived the workers to be the consumers of capital, a high price of capital would mean that in order to obtain what they needed a larger portion of the workers' produce would have to be turned over to the capitalists. Thus, this left less of their product available to be used as wages which could be used by the workers to buy commodities. The greater the profits received on the capital invested in production, the greater the labour time spent in production that was required to produce these capital goods. This would, of course, mean that the worker spent a better part of his labour time during the production process producing the surplus, rather than his own necessities.
The greater the profit of capital, or the more the capitalist made the laborer pay for the advance of his food, the use of the implements or machinery, and the occupation of the dwelling, the less of course remained to the laborer for the acquisition of any other object of desire (Thompson, 1824, p. 241).
According to Thompson, this meant that there existed a situation whereby higher profits necessarily meant lower wages, and that there was an agreement amongst capitalists to lower wages as much as possible (Thompson, 1824, p. 241).
With this explanation it is a self-evident proposition, that the higher the profits of capital - other things remaining the same - the lower must be the wages of labor; and as capitalists averred that manufactures and trade (or exchange of commodities) could not be carried on without such profits as they desired, the consequence was, that law everywhere lent its aid to the cupidity of force and fraud - ignorant to the public effects, sharp-sighted as to its own sinister interest - to keep down the wages of labor (Thompson, 1824, p. 241).
Thompson did not seem to recognise that distribution could affect the exchange values of the commodities (so he does not take into account Ricardo's "modifications" to his labour theory of value). His derivation of the inverse relationship between wages and profits was ascertained with a given value of the social product and conducted in terms of a simple labour theory of value. Thus, neither the rate of profit, nor the distribution of the social product between labour and capital impacted upon the exchange value of commodities.
Can workers benefit and how?
Thompson additionally notes that large quantities of capital in use in the economy afforded no guarantee that worker's wages would rise, that is, that the surplus will be distributed in a more favourable manner. This position was in opposition to a number of contemporary political economists (e.g., Smith and Ricardo) and their popularizers who argued that the workers benefited from the increasing accumulation of capital in the economy. It was argued that the workers would partake of the increasing wealth, and derive some gain from their increasing productivity over time.
But where all the capital in the community is in the hands of men called capitalists, and scarcely any remains in the hands of the producers, there will the price of the use of it will be very high, whether the absolute quantity of it be large or small, from the multitudes, the great majority of the community unprovided with capital, and of course the immense competition to obtain the use of it. The greater the supply of capital amongst the capitalists, the lower of course will become the price for its use, the numbers of the unprovided and the competition remaining the same. But the absolute amount of capital in the hands of the capitalists of any community, affords no guarantee to the efficient producers of wealth that the remuneration of their labor will be increased, that a greater proportion of its products will be left in their hands at their own disposal (Thompson, 1824, p. 172).
According to Thompson, is the problem capital itself? Certainly not ... the problem arises from who actually owns and controls the capital used in the production process.
Capitalist crisis:
Thompson expounded a notion of crisis in the capitalist system which arose from the nature of the capitalist distributive process and the unproductive consumption of the surplus by the capitalists.
On the one hand, the capitalists did not provide an equivalent for the goods that they received and consumed. On the other hand, the workers reproduced and replaced what commodities they consumed. This waste (or unproductive consumption) of the surplus product -- instead of being actively employed by the workers -- resulted in a lower level of future accumulation of capital, in the sense that a portion of the surplus was being consumed with no replacement by the capitalist consumers.
As such, this would constitute a loss of wealth to the community as a whole. Further, the ability to replace this consumed surplus, and hence achieve a less limited expansion of capital was constrained by the physical limit of the workers, which placed a barrier to further capital accumulation.
Thompson noted that the only limit to capital accumulation was that of the worker's own physical limits, and the impossibility of lowering the wages below that which enable them to obtain their necessities.
Under insecurity, there is no limit to the accumulations of capitalists, urged on by the mere competition for distinction, than the impossibility of further exactions from the productive laborers, unchecked by any necessity of personal exertion in the production (Thompson, 1824, p. 250).
Additionally, this process could lead to a distorted structure of production in favour of those industries yielding the highest rate of profit and luxury goods, rather than satisfying the needs of the whole society (Thompson, 1824, pp. 196-201).
The Call for Co-operativism:
According to Thompson, capitalist systems of production and distribution lead to distortions in the nature of production to benefit the interests of the capitalists rather than the majority of the population. He maintained that capitalist ownership of the means of production (and distribution) meant that the workers could never be fairly recompensed for their contributions to production. What does he call for? Worker control over capital and control over production decisions would ensure not only a fairer distribution of the surplus product, but it means that workers could ensure that what is produced and the whole structure of production could be used to the benefit of the majority of people in the country.
Future Diaries:
In terms of future diaries, I have realised that I have to do one more diary in classical economics prior to moving over to the decline and abandonment of the system. So, next week I am going to do Ricardo on the determination of wages. While Malthus introduced the principle of population into the discussion, it was codified into classical economics by Ricardo. The principle was an uneasy fit and introduced inconsistencies into the discussion of wages, which are not present in Smith on wages. In order to understand the wages-fund theory and its rise, we are going to need Ricardo as it cannot be developed off of Smith’s pre-principle of population discussion. I will also quickly discuss Ricardo on the impact of the introduction of machinery and the creation of persistent unemployment due to its introduction. Prior to Ricardo’s admission, he insisted that certainly unemployment would occur but believed that it would be temporary as workers would find work elsewhere due to the expansion of the economy. After Barton’s discussion on machinery and poverty and his call for the expansion of the Poor Laws, Ricardo accepted his point. This was a very contentious argument and was one of the points of attack against classical theory, so it is relevant.
The following week, I will do a general summation of classical economic theory. Then, I will do a general summation of the attack and decline: referred to by Samuel Hollander as the post-Ricardian dissension. I will then discuss the specifics of the attack against classical economics. I will begin with the wages-fund theory, then we will look at the 1834 Poor Law Amendment in comparison with the Old Poor Law and its impact on the poor, next, I will examine the justification for the right of the capitalist to earn profits (which did not exist prior in classical theory) and its culmination in the abstinence theory of profits (2 separate diaries). I will then need feedback from you for the next diaries: I can discuss alternative theories of value put forward during the time from a critical perspective (e.g., subjective determinations of prices, supply and demand determinations and the capital theory of value by Torrens) if people are interested. I then, if people are still interested do specific topics in Marx’s Das Capital, this will be a series of diaries. Alternatively, I can end this series with a diary on the creation of marginalist economics (aka Neoclassical economic theory) in the 1870s and compare this new theory to the older theory.
Readings and references:
Claeys, Gregory. (1987) Machinery, Money and the Millennium: From Moral Economy to Socialism, 1815-1860, Princeton, NJ: Princeton University Press.
Dobb, Maurice. (1973) Theories of Value and Distribution Since Adam Smith, Cambridge: Cambridge University Press.
Hollander, Samuel. (1980) "The Post-Ricardian Dissension: A Case-Study in Economics and Ideology," Oxford Economic Papers, Volume 32, No. 3, November, pp. 370-410.
Thompson, Noel, W. (1984) The People's Science: The Popular Political Economy of Exploitation and Crisis 1816-34, Cambridge: Cambridge University Press.
Thompson, William (1824) An Inquiry Into The Principles of the Distribution Of Wealth Most Conducive to Human Happiness, Applied to the Newly Proposed System of Voluntary Equality of Wealth, New York: A.M. Kelley Publishers, 1963.
Thompson, William (1827) Labor Rewarded - The Claims of Capital and Labor Conciliated; or How to Secure Labor the Whole of Its Exertions, New York: A.M. Kelley Publishers, 1969.